Economics 101

I am going to call this section Economics 101. It will serve as a base page where I can reference back if its been a long time since you took economics.


This is a standard supply curve. Basically what it suggests is that as the price of a good increases, more people will be willing to produce that good. So, as we move up the price scale, the amount of units produced will increase, moving to the right. If we were to think about this as a bottles of cola, well, if the price were low, say 10 cents, then only a few companies would be able to participate (the most efficient, or lowest cost) and thus the amount of bottles produced would be low. If the price were high say $100, then more companies would be able to cover their costs and the amount of bottles produced increases.

Next we have a demand curve. It is the opposite of the price curve. What the demand curve suggests is that as the price of a good goes down, the demand for that curve will increase, thus the graph goes to the right. What this means is that when the price goes down, more people can afford to buy it and do so. Again, think about this as if it were a bottle of cola. If a bottle cost $100, you probably wouldn’t buy it. Probably only a handful of people would (those that have a lot of money and really love cola), so we’re at the upper left corner of the graph. But if you were to bring the price down, say to 10 cents, then a lot of people would buy it. They would probably buy lots of it because its so cheap (the bottom right).

But you can’t sell cola at 10 cents because that is more expensive then it costs to produce, so now we are limited by the supply curve.

So, if the cost is high, then companies will be able to produce but no one will be able to buy. If the cost is low, then everyone will be want to buy but very few will be able to produce. So the answer is that when we put the two lines together, their point of intersection is where the price makes the demand (price is low enough that people buy) equal the supply (price is high enough that enough groups produce). Thus the market will find a natural price point for any good or service. If the price is too low, then demand will outstrip supply, and the price will increase until they equal. Vice versa, if the price is too high, supply will outstrip demand, and the price will drop until some supply drops off and the two lines meet.

So, what happens when the price is too low? Well, the demand will be much higher than the supply creating excess demand. That's when you'll see store shelves empty and people won't be able to get enough cola. So, what happens now? The price is raised such that the excess demand is reduced, both as a function of increased supply and decreased demand. (the middle graph, the green dot moves up along the demand curve). Eventually, the price keeps rising until the supply equals demand.

And that is the end of economics 101.